Hog Markets and the Porcine Epidemic Diarrhea Virus

Porcine Epidemic Diarrhea Virus (PEDv) has spread rapidly through the United States swine herd since initial diagnosis in spring 2013. By May 2014, it had been identified in 29 of the contiguous states. Incidence has been greatest in the hog dense states and also Oklahoma and Kansas, as shown in Figure 1. Data are number of positives based on sample genetic tests, taken from National Animal Health Laboratory Network (NAHLN), as reported in www.aasv.org/pedv/PEDv_weekly_report_140326.pdf.

Spread primarily through feces, PEDv induces watery diarrhea, vomiting, and dehydration. The disease, which is not believed to present food safety or zoonotic risks, is generally not fatal for weaned pigs, and older pigs typically recover after about a week. A close genetic variant has circulated through European countries for many years, though the strain circulating through North America bears strongest genetic correlation with types found in eastern Asia.

Prospective impacts on hog markets are unclear. In the March 2014 issue of Rabobank AgFocus, Will Sawyer and Pablo Sherwell speculatively projected a 12.5% decline in North American slaughter levels over 2014–2015 when compared with 2013. Futures traders seeking to process supply-side implications have raised June 2014 maturing lean hog futures prices from about $0.90/lb in April 2013 to about $1.20/lb in May 2014 (Figure 2). The June 2015 maturing contract however, was trading around $0.95/lb on May 20. Figure 3, from CME group home pages, depicts price time series for contracts maturing in June 2014 and June 2015.

The purpose of this article is to reflect on two matters: discussion of pertinent public and private biosecurity infrastructure; and likely market adaptation to the disease shock.

Biosecurity

As fecal transmission appears to be the principal mode of transmission, infection will involve physical movement of an infected animal or objects contaminated. Investigations to this point suggest that the virus can survive outside a host for sufficient time to infect through contaminated assets. Although regulations are in place at US points of entry that screen imported livestock, resources allocated to do this are small. The government is also involved in seeking to identify animal disease risks from abroad, and sometimes assisting foreign governments when managing these risks. The PEDv outbreak has been tracked by NAHLN, while state governments are involved in interstate movement controls, educational outreach to growers, and a variety of other endeavors. In April 2014 the USDA declared its intention to mandate reporting of infected herds and institute a national control program.

The final defense is on-farm. Standard biosecurity measures apply, ones that most farms already seek to follow and that also apply for preventing Porcine Reproductive & Respiratory Syndrome virus entry. United States hog production has been organized around longer-term contractual relations for many years. Gilts for the breeding herd and feeder pigs are generally not traded in open markets.

Record keeping, perimeter security, and other biosecurity investments entail large fixed-cost components that involve lower unit costs when applied to larger production units. A reflex response to learning about a disease that spreads rapidly through a production barn may be to wonder why large confined animal facility owners are willing to risk so much to a biosecurity failure. However, fixed-cost considerations suggest that the longer-run response to events such as these is likely to expand both production facilities and resources intent on keeping the disease out.

Market Adaptation

Table 1 shows pigs per litter by herd size since 2000. Data are from the Quarterly Hogs and Pigs Report as issued by the USDA.

The table reveals two points. First, when compared with smaller units, larger sow units perform markedly better by this productivity measure and also appear to have improved at a faster rate over time. Secondly, so far as one can rely on these data, PEDv has set back productivity growth in this measure by about five years. The impact has been uniform across scale of operation.

For both species, dressed slaughter weight has increased by 9%–10% over 1998–2013. Many factors have likely contributed to this change in marketing weight, including genetic improvements, changes in overall feed prices and relative changes in feed price components.

Among possible slaughter weight determinants, we focus on the effects of litter size. Two ways of meeting demand are to increase species breeding herd and to grow animals out to a heavier weight. Biological time lags preclude the former in the short run. Short-run adjustments to meet an increase in demand will entail more intensive feeding to fatten at higher marginal cost. Longer-run, after a year or so for hogs, an expanded breeding herd can also meet demand so that growers will equate the marginal cost of meat due to an increase in breeding herd maintenance costs with the marginal cost of meat due to an increase in feedlot activities. A comparison of Figures 2 and 3 suggests that growers expect longer-run supply adjustments. In the shorter-run lean hog prices were at $1.20/lb in May, but futures prices for a year ahead are $0.95/lb. These differential price responses could reflect anticipated solution or adaptation to PEDv infection and/or anticipated sow herd expansion. The March, 2014 Quarterly Hogs and Pigs Report has revealed a three percent expansion in December-February sow herd numbers over the prior year.

One way to view a reduction in litter size is as an increase in the fixed cost of breeding for any given slaughtered animal. Hog production is a competitive business with free entry so the long run unit cost of producing meat should equal the unit price received. All else equal, as fixed costs increase growers will seek to spread these costs over greater output per animal. Data in Tables 1 and 2 show that, likely for reasons other than litter size, the trend has been toward heavier slaughter weights. The reasoning above suggests that this trend may strengthen over the near future, and especially so if PEDv continues to affect litter size.